When I talk about economists, one of the greatest compliments I give is to say that they changed the way people think about the world. Al Roth definitely fits into that category. The type of economics he is best known for is what is called “Market Design.” Essentially, it means bringing market-type thinking to areas in which historically non-market allocation mechanisms have been used. A few examples of the areas Roth has explored are matching fledgling doctors to hospitals for their residency, matching students to public schools in school choice programs, and matching kidney donors with those who need a kidney.

I know Roth changed my thinking because the first time I read Roth’s work in this area I had a strong reaction: this isn’t really economics. His applications, while based on general theories and principles, involve solutions that are highly dependent on the particular institutions and quirks of the setting he is studying. In my youth, I was under the illusion that economic principles should be universal. It was in part through my appreciation of Roth’s work, that I came to think very differently about the world and appreciate how critical it is to think about the specifics of the setting when coming up with solutions. Now, when I read Roth’s work, it definitely feels to me like economics.

An example that we’ve written about here at the blog is Roth’s work on kidney transplants. As much as economists think we should just have a market for kidneys, the rest of the world hasn’t quite caught up to that idea. So Roth came up with a different scheme – one that involves barter — that takes into account the real-world constraints that people aren’t allowed to pay for kidneys. So instead he developed a clearinghouse for connecting chains of pairs in which there is both a person who needs a kidney transplant and a person willing to give one, but who is not a good match medically to donate to his or her loved one. The key is that the potential donor is a good match for someone, just not for the loved one. But, if you can make a chain in which it all balances out: each donor matches with someone willing to donate, then it works out for everyone.

If you want to read more about Roth and his work, we’ve featured him most recently here, and you can find all the past links here.

You know, I hadn’t thought about the kidney problem before. We’re staring at a big, fat market failure here.

Duh, you say; any banned substance defines a market failure. But that’s not what I’m talking about.

See, I donate blood regularly, even though I get no money. Why? I can do some social good at very little cost; I replenish my blood supply regularly whether I’m sharing it or not, so why not share? (And, ok, I get Lorna Doones afterwards, but that’s not really the motivation. Honest.)

But it never occurs to me to donate a kidney. Why not? Higher costs. In particular, the blood supply is sufficiently liquid (ha!) that I can give blood while being reasonably confident that I could get substitute blood if I need it. I don’t have the same confidence about the kidney supply. If I give up a kidney, and then I need a kidney, I’m screwed. So I hang onto my spare.

In short, by hanging onto our spare kidneys instead of banking them, we’re self-insuring – which means we’re all forsaking the advantages of risk-pooling. Because there is no FDIC of the kidney bank, we all live in fear of depositing a kidney in the organ bank because we’re not confident that the bank would have the assets to permit me to make a withdrawal when needed.

But imagine some critical mass of people put their kidneys on the market, such that the supply swamped the demand. This would help anyone who knew she needed a kidney. But it would also help anyone who knew that she would like to donate a kidney, by providing a liquid supply of replacement spares.

This arrangement would seem to help everyone – except, I guess, risk-loving people who wanted to maintain a high price for their kidneys. But that’s akin to saying that the FDIC helps everyone – except risk-loving lenders who wanted to enjoy the high risk premiums of making deposits into banks that lacked FDIC insurance. By and large, I think there must be a kind of market intervention that would produce better outcomes than the status quo, or even better than laissez faire.

I was using the banking metaphor to emphasize the importance of maintaining liquidity: Just as with banks, people will be more willing to make a deposit if they are confident they can also make a withdrawal.

That said, a kidney “bank” need not contain actual organs; it could contain lists of people who are willing to donate organs (perhaps along with the biological attributes of those people sufficient to identify appropriate matches; not all kidneys are interchangeable). See, for example, the bone marrow registry.

But even if we COULD overcome the technical challenges – either engineer a way to store kidneys, or maintain a registry – it is not clear to me that we would overcome the operational challenges necessary to maintain liquidity. Who would be willing to offer a kidney into a scheme that had no track record of success? And even if you were willing, would you be willing to undergo all the testing to determine your donor compatibility profile? And who would pay for all that testing?

Thus, even if we had a free market in kidneys, it is not obvious to me that we would overcome the liquidity problem.